Small Solace

ldblquote Both the Government and Central Bank have responded positively to our concerns about the negative effect of Debit Tax
dblquote , Primary Dealers Association
quote s President, Ajantha Madurapperuma told Lanka Business Online.

rnrnldblquote We were told that changes are currently been drafted to exclude the repo market from Debit Tax
dblquote , he added.

rnrnThe overnight repo market, which amounts to Rs. 10 bn to Rs. 16 bn in volumes according to latest estimates, would not have been able to absorb the new tax according to analysts.

rnrnIf the 0.1 percent new tax were enacted, a typical overnight repo transaction of Rs. 10 mn would be liable for a Rs. 10,000 tax, while the actual earning at 12.5 percent per annum on the government bond would amount to only Rs. 3,425.

rnrnldblquote Under this scenario, for each Rs. 10 mn transaction you would lose Rs. 6,576. It was a case of having either the tax or the secondary market
dblquote , Madurapperuma said.

rnrnMeanwhile, in a separate proposal, the Association has pointed out the practical benefits of collecting the newly imposed 10 percent withholding tax on government securities at the point of primary auction, instead of taxing the final bearer to maturity.

rnrnldblquote In the government securities secondary market, the bills are traded many times before it reaches the final bearer. If the full 10 percent tax is slapped on the final bearer it will result in a net loss since he receives only the pro-rated interest on the security according to the time held
dblquote , Madurapperuma said.

rnrnldblquote In the same time, it is not practically possible to collect the tax from the earlier beares who traded without any recourse
dblquote .

rnrnThe only realistic alternative is to collect the tax at the primary auction and enable the primary dealer to pass it along to the secondary market using the pricing mechanism, Madurapperuma added.rn